Economic Outlook: Gulf of Mexico giveaway

The U.S. energy policy, concisely summed up as a hodgepodge of educated guesswork, is being tested by a merger between China's CNOOC and Canada's Nexen Inc.

The problem, saturated in irony, is that Nexen owns two leases in the Gulf of Mexico, in offshore U.S. waters, that are covered by the Deepwater Royalty Relief Act of 1995, which was written to encourage oil development when the price of oil was low.

The law allowed oil companies to skip paying royalties on offshore oil under various stipulations, much of which were balanced on the cost of the exploration. The deeper the well and the higher the development costs, the more in royalties the U.S. would excuse. After all, someone has to make a profit.

What appears to be largely unappreciated until now, however, was that China, which amassed a trading surplus with the United States of $24 billion in April alone, could step in and buy the royalty-free leases by gobbling up Nexen, which it is proposing to do for $15 billion.

China, of course, is the trading partner the United States loves to hate. Many say China undermines international fair play with currency manipulations, protectionist policies and subsidized energy. On top of that, cheap labor in China has certainly drained the United States of much of its manufacturing base over the years.

Rep. Ed Markey, D-Mass., says Nexen has produced 32 million barrels of oil and 34 million cubic feet of natural gas from the Gulf of Mexico, gratis. Others have estimated the United States will be giving up $80 billion in royalties in the next 25 years -- and at some point, as somebody might say, this will add up to real money.

Markey recently joined Sen. Charles Schumer, D-N.Y., in requesting the Treasury Department block the merger between Nexen and CNOOC.

"Giving valuable American resources away to wealthy multinational corporations is wasteful, but giving valuable American resources away to a foreign government is far worse: it has the potential to directly undermine American economic and national security," Markey wrote in a letter to the Treasury Department.

The benefits of the Deepwater Royalty Relief Act are simple enough: Companies could afford to drill in deep areas and add to the global oil supply, which keeps prices down. In Canada's case, some of the profits return when Canadians visit the United States as tourists or on shopping excursions.

In this case, however Markey said he believes the merger "could lead to a massive transfer of wealth from the American people to the Chinese government, and I strongly urge you to block this proposed transaction until, at a minimum, parties to the merger agree to pay royalties to the U.S. taxpayer on all oil produced off American shores or relinquish any ownership interests in these leases."

Luckily for the United States, the Energy Information Administration estimates there are 18,812 billion cubic feet of dry natural gas and 4,144 million barrels of crude oil reserves in federal territory in the Gulf of Mexico.

Even though 45 percent of the natural gas and 79 percent of the crude oil under what is considered deepwater areas, that means there is plenty of time to figure out a far-sighted energy policy for the Gulf of Mexico that can benefit the taxpayers in the country that owns the oil.

Here's a suggestion Markey and Schumer might like: Start now.

In international markets, the Nikkei 225 index in Japan dropped 0.61 percent while the Shanghai composite index in China rose 0.94 percent. The Hang Seng index in Hong Kong gained 0.12 percent while the Sensex in India also added 0.12 percent.

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